MEDIA MEGADEAL: THE NEW COMPANY; Two Become One, and Then What?

With the tough restrictions imposed by the Federal Trade Commission, falling stock prices and the clouded economic outlook, America Online and Time Warner face some significant speed bumps as they try to achieve their grand visions of being the media company for the new century.

But while these impediments may slow the companies, they do not fundamentally alter the ability of the unified AOL Time Warner to take advantage of its combined power in broadcasting, publishing, film, music and the Internet, analysts and executives said yesterday.

To be sure, a slowing economy will certainly hurt the company, especially its advertising sales. And Time Warner employees have been told to prepare for cutbacks and possibly layoffs. But analysts say that AOL Time Warner and other media behemoths like Viacom, Disney and the News Corporation, will be better able to weather a storm than smaller companies.

''Everybody is challenged by a weaker market, but the biggest companies have the best ability to cut costs and create new businesses,'' said Jessica Reif Cohen, an analyst with Merrill Lynch. ''If you look at the scale and scope of Time Warner, they have the industry-leading consumer brands and the leading Internet platform, so their ability to reach consumers in all demographic groups is awesome.''

They worried that the deal would create a media octopus with such strong tentacles in so many areas that it could have undue influence over the provision of information and entertainment.

That concern led to a much longer and tougher antitrust review than America Online and Time Warner expected. But in the end, the agreement they forged with the trade commission substantially restricts only one of the octopus's arms: high-speed Internet access over cable systems. The rest are largely free to exert their strength.

The commission insisted that Time Warner's cable unit, which has about 20 percent of the national market, could not give preferential treatment to America Online's high-speed service. Rather, it must let cable subscribers choose among several Internet options, and even the smallest Internet service provider is guaranteed a deal as good as AOL gets.

The main beneficiaries of the restrictions are Earthlink, Microsoft's MSN service and smaller Internet providers that will be able to provide service over Time Warner's cable systems on particularly attractive terms. Time Warner, as a result, may not be able to charge them as much as it otherwise would have.

''AOL Time Warner has lost the ability to extract favorable pricing because it is such a big gorilla,'' said Paul Noglows, an analyst with Chase H&Q.

Analysts said they could not yet assess how much revenue the company was forgoing by giving up its ability to extract the best deal it can -- and both Time Warner and AOL have reputations for driving hard bargains. But in a deal with Earthlink announced two weeks ago, Time Warner is charging $27 a month per subscriber for access to its network. That is $3 a month less than Time Warner charges Road Runner, the high-speed Internet service that it controls and that has been the exclusive Internet offering on Time Warner systems so far.

Time Warner says that it will make up on volume what it loses on price.

Moreover, as much as Time Warner cable may be hurt, the agreement with the trade commission may indirectly provide great benefit for AOL's online service. Though it does not directly apply to other cable companies, both AOL and consumer groups hope it will become a template for the industry. The cable companies argue that they should not be under such a strict regime. But in any case, since the AOL Time Warner deal was announced, several -- including AT&T, the largest -- have said they will open their systems to competing Internet offerings. AOL, as the largest Internet provider, could well be in the best position to benefit from this shift.

''Even without being a monopoly, they can still emerge as the dominant player in broadband access,'' Mr. Noglows said.

But beyond high-speed Internet service, the terms announced yesterday do little to impede AOL Time Warner.

For example, there is nothing that explicitly prevents a repeat of the dispute last spring in which Time Warner cut off Disney's ABC network from its cable systems for almost two days in a contract dispute. Nor would AOL be prevented from similarly cutting off ABCnews.com from its Internet service or from any future interactive television service.

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Some commissioners wanted to impose restrictions on the company's ability to give preferential treatment to its content, like CNN or Warner Brothers cartoons, on its Internet and interactive TV services.

The deal prevents Time Warner Cable from blocking an Internet service, like Earthlink, from transmitting a video signal like a movie or a cable station. The technology to do that is still shaky, but the prospect of an end run around the cable company's lucrative premium channel and pay-per-view business caused other cable operators to ban high-speed services from streaming video longer than 10 minutes.

But the trade commission did not impose any rules on the sort of interactive television that combines an existing cable station with Internet information, like a chat room superimposed over a football game. Wary of regulating such an embryonic business, the commission ultimately decided to keep an eye on the issue. AOL Time Warner is required to inform the commission of any complaints it receives from companies that feel their programming has been unfairly blocked. But if it finds antitrust violations, the trade commission or the Justice Department would have to take AOL Time Warner to court.

Barry Schuler, the chief executive of the AOL online service, said that while the company had the right to hoard Time Warner's content, it did not see much reason to do so.

''Over the years, exclusive content has not proven to be a driver of our business,'' he said. ''People buy the Internet because they want access to everything.''

The biggest opportunity for the combined companies to use their power is in putting together advertising packages. Any company that wants to appear on the opening screen of America Online's service, its most prominent position, might well be required to buy commercials on some of the lesser-rated programs on the WB network, for example. Of course, that is hardly a new practice for media companies.

Still, the company's ability to be tough with advertisers will fall off sharply if the economy declines. Already, advertising from what is left of the dot-com economy has slowed significantly.

But while AOL and Time Warner executives have said they hope that advertising will be the fastest-growing portion of their business, today it represents about 20 percent of their revenue, said Tom Wolzien, an analyst with Sanford C. Bernstein.

''They are better able to weather an economic downturn than other media companies,'' Mr. Wolzein said. ''At Disney, 30 percent of the revenue comes from advertising; at Viacom it's 40 percent, and at Yahoo it's 100 percent.''

Beyond that, much of the rest of Time Warner's business, like cable subscriptions and movie sales, are historically not hurt in recessions.

Executives in some Time Warner divisions say they have been told to expect cutbacks, at least in some support areas like the legal and information technology departments and human resources. And Mr. Wolzein said he would not be surprised to see broader cuts if the economy soured.

''Time Warner has done some trimming over the years, but it's a company that could use another look,'' he said. An AOL spokesman declined to comment on any potential layoffs. The combined companies have 85,000 employees.

Time Inc. executives said bonus packages, an important component of their compensation, would be radically changed under America Online management. The company will phase in the award of stock options, not cash, as a year-end bonus.

More important, bonuses will no longer be based on one division's importance, but will be hinged on the performance of AOL Time Warner as a whole, to encourage integration.